There is a dangerous point in taxation where the government stops collecting revenue and starts destroying the economic activity that generates it. Kenya may be approaching that point. The growing protests among importers over customs valuation should therefore not be dismissed as the predictable complaints of businesspeople reluctant to pay taxes. What traders are describing raises a much bigger economic question: does the government understand how small businesses actually survive?
Consider the experience being reported by some small importers. A trader travels to Guangzhou and purchases household goods, clothes, utensils or other merchandise for perhaps Sh700,000. The goods arrive in Mombasa, but the customs valuation used for taxation can bear little resemblance, the trader argues, to the actual commercial value of the consignment.
Importers are complaining that a benchmark they say previously stood around Sh2.5 million for certain consolidated cargo has risen to approximately Sh3.2 million from August 20.
When the tax bill outruns the goods
If these accounts are accurate, the implications are extraordinary. Apply 25 per cent import duty to Sh3.2 million and you already have Sh800,000 before the additional applicable taxes, levies and charges enter the calculation. Add VAT, Import Declaration Fee, Railway Development Levy and other costs, and traders say liabilities can become multiples of what they actually paid for their merchandise.
Some report tax demands approaching Sh2.2 million on goods purchased for roughly Sh700,000. Add shipping, port charges, storage and related expenses and the economics of the transaction become absurd.
At that point, we are no longer discussing taxation. We are discussing whether the business remains commercially possible.
Government understandably requires customs valuation systems because invoices can be manipulated. Under-declaration is real. Revenue authorities everywhere must protect the tax base against traders who deliberately undervalue imports.
But preventing fraud cannot justify replacing one fiction with another. If an importer declares a suspiciously low value, KRA should use transparent, evidence-based mechanisms to determine the proper customs value. The answer cannot simply be an administrative figure disconnected from the genuine transaction and market realities.
Taxation must ultimately correspond to economic value.
Otherwise, we create the remarkable situation where the tax collector imagines a business to be more profitable than the business itself knows it is.
Kenya runs on small traders, not giants
And this is where President William Ruto’s administration needs to understand something fundamental about Kenya. Kenya is not primarily an economy of giant corporations.
Kenya is an economy of small businesses. Walk through Nairobi’s CBD. Visit Nyamakima, Kamukunji, Eastleigh, Gikomba or River Road. Go to markets in Mombasa, Kisumu, Nakuru, Eldoret, Meru or virtually any Kenyan town. The country’s economic bloodstream consists of thousands upon thousands of modest traders moving relatively small quantities of goods.
They employ shop attendants.
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They hire transporters. They pay rent. They buy electricity. They use M-Pesa. They pay county licences. They pay VAT and customs duties. They support landlords, clearing agents, mechanics, restaurants, boda boda riders and countless other businesses around them. One importing business may look insignificant on a Treasury spreadsheet. Multiply it by hundreds of thousands, and you discover the Kenyan economy.
That is why the reported emptiness now visible in sections of Nairobi’s CBD should worry policymakers. Government officials can visit the city centre and witness the consequences themselves. Shops without customers are not merely unfortunate businesses. They are future tax revenues disappearing before our eyes.
A closed shop pays no VAT. A bankrupt importer pays no customs duty. A retrenched employee pays no PAYE. An empty commercial building generates less economic activity. A businessperson who gives up importing creates no jobs. Eventually the government discovers the elementary lesson that every successful tax authority understands: you cannot tax economic activity after you have killed it.
You cannot tax a business that no longer exists
The tragedy is that Kenya desperately needs businesses to expand. Our young population requires hundreds of thousands of new jobs every year. Government cannot employ everyone. Large corporations will not employ everyone. The greatest realistic employment machine available to Kenya is the small and medium enterprise sector. Yet we repeatedly treat entrepreneurs like suspects. We tax them when they import. We tax them when they sell. We license them nationally and locally. We increase energy costs. We raise compliance costs. We make credit expensive. We delay government payments. And when they somehow remain standing, we invent another administrative burden. This is not economic policy. It is an endurance test.
Delay at the port can become bankruptcy by invoice
Government should also appreciate what happens when a trader’s goods become trapped at the port. Many small importers operate on borrowed capital. Every additional week means interest, storage charges, lost sales and deteriorating relationships with customers.
Telling such a trader to challenge the valuation by deconsolidating cargo and having goods assessed item by item may sound reasonable inside an office. In practice, traders complain that the process can cause devastating delays while charges accumulate. Justice delayed at the port can become bankruptcy delivered by invoice.
President Ruto frequently speaks about expanding the tax base. That objective is legitimate. Kenya requires revenue to finance public services and meet its obligations. But expanding the tax base and squeezing the existing tax base to death are completely different strategies.
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A sensible government wants 100 businesses paying reasonable taxes tomorrow rather than 20 surviving businesses paying punitive taxes today. Revenue growth ultimately comes from economic growth. When businesses expand, government revenue expands naturally. When investment rises, employment rises. When workers earn more, consumption increases. When consumption increases, VAT collections rise. When companies make profits, corporate taxes rise. Prosperity is the most reliable revenue mobilisation strategy ever invented.
The Ruto administration therefore needs to reconsider this increasingly adversarial relationship with Kenyan enterprise. KRA should collect every shilling lawfully due. Tax evasion should be confronted firmly. Fraudulent invoices should be investigated. But legitimate traders must also receive predictable, transparent and commercially rational customs treatment.
The government cannot preach entrepreneurship in the morning and suffocate entrepreneurs at the port in the afternoon. Kenya’s small businesses already struggle under weak consumer demand, expensive credit, and a punishing cost of doing business. Customs policy should not become the final blow.
There is an old principle of husbandry that even Treasury mandarins should understand: you do not obtain more milk by slaughtering the cow. Keep squeezing Kenyan businesses this way and eventually there will be nothing left to squeeze. Then KRA may finally achieve the impossible. A country with plenty of taxes and nobody left to tax.
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